BoomBit (WSE:BBT) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at BoomBit (WSE:BBT) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for BoomBit:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.057 = zł4.4m ÷ (zł153m - zł75m) (Based on the trailing twelve months to June 2023).

Therefore, BoomBit has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 20%.

View our latest analysis for BoomBit

Historical performance is a great place to start when researching a stock so above you can see the gauge for BoomBit's ROCE against it's prior returns. If you'd like to look at how BoomBit has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From BoomBit's ROCE Trend?

When we looked at the ROCE trend at BoomBit, we didn't gain much confidence. Around five years ago the returns on capital were 51%, but since then they've fallen to 5.7%. However it looks like BoomBit might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, BoomBit's current liabilities have increased over the last five years to 49% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On BoomBit's ROCE

In summary, BoomBit is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 24% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think BoomBit has the makings of a multi-bagger.

If you want to continue researching BoomBit, you might be interested to know about the 2 warning signs that our analysis has discovered.

While BoomBit isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.